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Stocks vs Indices: A Trading Comparison

An Introduction to U.S. Stock Market Indexes

For active traders, there are so many choices when it comes to assets for trading. Chief among these are stocks (also known as shares), and indices. Usually it makes sense to focus on either stocks or indices. Of course, it’s possible to do both, but the vast majority of serious-minded enthusiasts tend to favor one or the other. This ensures your full attention on one particular asset, and provides a better chance of mastering it’s price movements.

So what are some of the key differences between the stocks and indices? In the following article, we’ll cover the important similarities and differences. An index trading platform offers nearly as many selections as its stock counterpart. Today’s versatile index brokers and platforms let traders select from a huge menu of major and minor indices. Because you can’t outright purchase a share of an index, most participants choose to gain exposure via options, futures, or contracts for difference. So, as far as selection goes, both camps have plenty of variety at their disposal.

Volatility

Individual company shares tend to be more volatile than any other financial instrument. That’s because when you take a position in ABC company, for example your profit or loss fate is tied directly to the company’s fortunes. If ABC releases a cancer cure medicine next week, you stand to make millions. Or, if the company decides to file for bankruptcy, you might find yourself holding some rather worthless paper.

Risk

Market indices are not subject to manipulation by banks, governments, or hucksters. The logic is simple; when you’re dealing with the calculated value of multiple corporations’ shares, no one person can interfere with the wisdom of the wider marketplace or global economy. For this reason alone, many risk-averse investors choose to take part in index trading. Whenever you purchase a financial instrument that represents the value of dozens, or perhaps hundreds of corporations, you’re automatically diversified. There are no worries about spreading the risk as is the case with share portfolios.

A Real-World Example

Some speculators like to play the oil market by purchasing shares of companies that drill, refine, or sell related products at the retail level. The COVID pandemic of sent oil prices to record lows in early 2020. Anyone who had a long position in one of the big refining companies had a very bad quarter, and stood to lose their entire investment. On the other hand, investors with positions in energy sector indices didn’t do so badly. Yes, the oil-related components of their basket of holdings took a major hit. But, the rest of the sector dipped temporarily and then came back with the rest of the market by late summer.

Reading the News

For investors who like to study long-term trends and take positions based on their knowledge, individual companies can be extremely difficult to read. The national or global economy is not nearly as murky as the fortunes of a single corporation. That’s why many of today’s active traders prefer to speculate via one of the larger index boards. For example, who knows what’s in store for a particular tech company that just restructured its board of directors? Indeed, how can you begin to forecast what XYZ, Inc. will do in light of the current worker shortage in the chemical industry. They might go under, or they might be the lone survivor in a highly competitive industry.

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